Strategies for delaying income to 2013/14

From 6 April 2013 the additional rate of income tax will fall from 50% to 45% (42.5% to 37.5% for dividend income).  It will therefore be advantageous for higher earners to delay the receipt of income until after this date, effectively saving 5% on any income successfully deferred.

The additional rates apply to income in excess of £150,000.  Additional rate taxpayers are not entitled to a personal allowance as, at this level of income, it has been tapered away to nil.

The following strategies could be used to reduce an individual's income, ideally to an amount of less than £150,000 in 2012/13, to ensure income is not taxed at the additional rates unnecessarily.

Owner-manager of a limited company

The most effective strategy will be to:

·         delay the vote and payment of dividends until after 5 April 2013,

·         cover any cash flow difficulties via a short-term loan from the company, and

·         repay the loan using the delayed dividends

From a cash flow point of view, delaying dividend payments may also mean that the individual's Self Assessment payments on account can be reduced for 2012/13 and, as a consequence of the lower level of income in 2012/13, the payments on account will automatically be lower in 2013/14.

Self-employed or in partnership

Strategies for delaying income for those who are self-employed or in partnership are less obvious and will depend on the specific circumstances, but some ideas include:

·         maximise pension contributions in order to increase the basic rate and higher rate tax bands

·         make donations to charity under gift aid

·         ensure any trading losses are utilised in the periods of assessment which fall to be taxed in the 2012/13 tax years, rather than carrying forward losses to 2013/14

·          accelerate capital expenditure which will qualify for the annual investment allowance

Employees

Assuming income-producing assets have been transferred to a spouse/civil partner where appropriate; there is usually little an employee can do to influence his remuneration package unless he is also the owner of the business.

Unless the employee can persuade the employer to incorporate benefits free from income tax and national insurance into his remuneration package, the most likely option is to increase his basic rate and higher rate tax bands by making pension contributions (via additional voluntary contributions (AVCs)) or donations to charity under gift aid.

However, for employees who are able influence their remuneration packages, it may be possible to:

·         move a contractual bonus payment date from 31 March 2013 to 6 April 2013

·          include more benefits free from income tax and national insurance by way of a salary sacrifice

There are potential traps with some of the above ideas, for example, the potential for HMRC to reclassify dividends as employment income, and with pension contributions you must also take care to avoid an annual allowance charge. You should therefore seek advice before any action is taken.

For further information/advice on this topic please contact us: http://www.wardwilliams.co.uk/